The Factors of Production (II)

What really distinguishes enterprise from other factors is that it has to carry all the risks of production. How these risks arise will be examined in more detail later. Briefly, they occur because production takes time. The entrepreneur engages labour and buys raw materials and machinery now in order to produce a good which will not be sold until some time in the future. Whether costs are recovered will depend upon the demand for the good when it comes to be sold. There may be a change in tastes in the meantime; or a rival may, through a better process, be putting the good on the market at a lower price. In such ways, an expected profit may turn out to be a loss.

Profit or loss is the reward of uncertainty-bearing. Whoever accepts this ultimate risk is the true entrepreneur - the farmer working on his own account, the doctor who starts his own practice, the persons who buy shares (the 'risk' capital) in a company, or the citizens of a state.

Organized Produce Markets (I)

As explained above, the market for certain commodities are worldwide. Moreover, many of these commodities arc in constant demand, either as basic raw material or as main foods or beverages for a large section of the world's people. England's foreign trade began with the export of raw wool in the thirteenth century, and it was extended by the subsequent development of the chartered companies. These were based in London, and it was there that merchants gathered to buy and sell the produce, which the companies’ ships brought from abroad.

The big change, however, came about with the expansion of International trade following the industrial revolution. The UK became the greatest importing and exporting nation in the world. London, her chief port and commercial city, not only imported the goods which were required for the people of her own country but built up an important business, acting as a go-between in the distribution of such commodities as tea, sugar, hides, skins and wool to many other countries, particularly those of western Europe. Hence formal ‘organized markets' developed. These markets are distinctive in that buying and selling takes place in a recognized building business is governed by agreed rules and conventions, and often only certain persons are allowed to engage in transactions. They are thus a highly developed form of market. Today, London has exchanges or auction centers for such commodities as rubber, wool, tea, coffee, furs, metals (tin, copper, lead and zinc), grain, and shipping freights (the Baltic Exchange). It must not be thought, however, that such organised produce markets exist only in London.

Organized Produce Markets (II)

Broadly speaking, organised markets fulfill three main functions. First, they enable manufacturers and wholesalers to obtain supplies of commodi­ties easily, quickly and at the competitive market price. Because they are composed of specialist buyers and sellers, prices are sensitive to any change in demand and supply. Thus they are perfect markets. Second, 'futures' dealings on these markets enable people to protect themselves from heavy losses through price changes. Thus a cotton grower prefers to know what price he will receive before his output is actually delivered to the market. On the other hand, a cotton spinner has to protect himself from a rise in the price of raw cotton between the time he quotes a price for his yarn and the time of its actual manufacture. Where a good is bought today for delivery today, the deal is known as a 'spot' transaction and the price is the 'spot price'. With many goods, however, it is possible to buy today for delivery in the future. The price agreed upon is the 'future' or 'forward' price. For a commodity to be dealt in on a futures market certain conditions must be fulfilled:

• the commodity must be durable, thereby enabling stocks to be carried;

• the commodity must be described in terms of grades which are internationally uniform;

• dealings must be frequent enough to occupy professional dealers;

• the commodity must be subject to price fluctuations.